Being young can be hard, financially speaking. You might be one of the many who are buried under student loans and tuition payments, or you might be taking on a mortgage for the first time, making car payments, feeding a new family, working on the bottom half of the career ladder, and taking on all the other monetary responsibilities that await after the graduation ceremonies are over.
It's certainly intimidating, and given the previously mentioned circumstances, it's understandable why so many people believe that it's impossible to become financially secure when you're young. But the truth is, you don't have to wait until you're 50 to feel like you have your financial act together. Here are six are things young investors can do now to not only keep their heads above water, but to build wealth.
1. Be Financially Literate
One of the biggest favors you can do for yourself and your future is to understand as much about the world of investing as you can. Ignorance makes you a sucker. So read, ask questions, and take classes. You don't need to become an accountant or a financial planner, but every single American does need to have a working knowledge of markets and instruments, how diversification and asset allocation work, how the credit markets work, the different kinds of insurance that exist, and how retirement accounts work, for example. That's just the beginning, but the point is that your curiosity will keep you from making bad decisions now that can have lifelong effects.
2. Live Beneath Your Means
As the saying goes, 'You don't get rich by spending all your money.'
Live by these words. This doesn't have to mean you live like a peasant. It means you need to maximize your income by performing well professionally, and it means you need to minimize your expenses by controlling your impulses, sticking to a budget, and refusing to compete with your friends over who has the better lifestyle.
This simple principle is a big catalyst to building wealth, and it will also reduce the chances that you'll get overleveraged or swallowed by credit card debt.
3. Open a Retirement Account
Opening a retirement account when you're young is like planting a seed that will bloom when you're 65. But considering that a lot of time passes between 25 and 65, looking at your retirement accounts every month for the next 40 years might be like watching grass grow. Nonetheless, saving now is going to give you more freedom in 10 years, when everybody else is trying to 'catch up' because they were busy spending all their money on overpriced cars and too many vacations.
4. Remember That Young Investors Are Better Positioned to Take Some Investing Risks
One of the really great things about being young is that you have time to correct your mistakes, and you also have time to win big. Older investors don't have this luxury, and this is why financial planners tell us that as we age we should put more of our money in less risky investments. Take advantage of your youth by welcoming some risk -- but do it intelligently. Don't risk what you can't afford to lose, and be sure to rely on those things you learned in step 1 (financial literacy) to tell you what right allocation of risky assets is right for you.
5. Don't Ignore Tax Planning
Most people ignore tax planning because they're busy and it seems complicated. But nothing stinks more than finding out you have to write a $3,000 check to Uncle Sam by April 15. So, consider the tax consequences of your decisions. For example, think before you drain your 401(k) account because you changed jobs or decided you really needed the cash. There are tax consequences! Likewise, if you contribute to an IRA rather than a trading account, for example, there may be tax benefits. Educating yourself about the relationships between taxes and investing puts money in your pocket.
6. Cherish Your FICO Score
Keep an eye on that all-important FICO score -- it affects many of your biggest life events. Want a new job? Your employer is going to check your credit score, so it better be high. Want a new apartment? The landlord is going to check your credit score. Want to buy a car or house? Same deal. See how this works? Pay your bills on time and keep your debt levels reasonable, or else you'll pay for it in ways you may have never imagined.
[InvestingAnswers Feature: 5 Things You Didn't Know Could Hurt Your FICO Score]
Being financially stable while you're young is possible, and it feels good. With everything else that's going on in a young person's life, why not reduce the stress?
